This was supposed to be the week when the Government announced a deal with our biggest banks about how much money they were going to lend to business - particularly SMEs - during 2011. But progress appears to have stalled, which presumably means the banks aren't happy with the proposed number, or with the strings attached. This is embarrassing for the Government, because it exposes them to accusations that they're being soft on the banks. But it's also bad for the banks: a generous-sounding deal would have alleviated much of the pressure they're facing over bonuses...
In truth, the chances are that this deal (Project Merlin, as it's called - although no sign of any magic wand-waving so far) has only been delayed, not derailed; both sides have too much to lose from the talks collapsing. The Government is still talking tough on bank reform: Nick Clegg made it clear on TV yesterday that splitting up investment and retail banking is still on the table (and Sir John Vickers, head of the independent commission looking at the sector, suggested on Saturday that the banks might have to financially ring-fence their various activities).
But despite all the rhetoric, it's eight months since the Election now and there's still no concrete deal on lending. That's politically bad for the Government; new Shadow Chancellor Ed Balls has already been making this point forcefully (in his own inimitable way). More significantly, of course, it's also bad for all those SMEs who still can't get access to bank finance.
Inevitably, it also makes the banks look bad. The delay may partly be due to the actual figure proposed (variously estimated to be between £160bn and £200bn), but according to the BBC's Robert Peston, 'governance' is also proving a stumbling block - possibly including, inter alia, a demand that the banks name their five highest-paid staff. Naturally the Government will be pushing for a tough settlement, so it's not surprising the negotiations are taking a while. But the banks have limited wiggle room - if they're serious about rehabilitating their reputation, they're going to have to cut a deal eventually. And they can't look too grudging about it, either.
They're clearly aware of these political pressures. Today's FT reports that Barclays boss Bob Diamond may start paying his investment bankers' bonuses using contingent convertible bonds, which change into equity if things go pear-shaped. This may not please said bankers (particularly if the American banks are still paying top dollar), but it would be a sensible concession on Barclays' part.
But for all the banks, striking a deal on SME lending will reduce the pressure on them to introduce tougher bonus curbs - both from the Government and the public. So all told, both sides really need to get Merlin sorted sooner rather than later. Another couple of weeks of delay (as some are suggesting) would be bad news for all concerned.